In Stryker Corp. v. National U. Fire Ins. Co., Nos. 15-1657/1664, 2016 WL 6818853 (6th Cir. November 18, 2016), the Sixth Circuit reversed an award of $8.6 Million.
In this liability insurance coverage case alleged under Michigan law, the Sixth Circuit held that the clear purpose of the consent-to-settle clause is to afford the liability carrier with the opportunity to negotiate settlement of claims going forward, not backward. In other words, the clause operates prospectively to deter conduct which would be an obstacle to the carrier's carrying out its indemnity obligations under the liability insurance contract.
The Sixth Circuit reversed in large measure because it held that the policyholder violated a consent-to-settle clause set forth in an excess carrier's policy, as it happened, by settling claims against the policyholder, and ten years later asking for its liability carrier's validation of the settlements that the policyholder made long ago.
Florida Courts have confronted consent judgments with a covenant not to execute in cases in which liability carriers have refused to defend their insureds. The judgment can only be enforceable against the carrier if it is not infected with an unreasonable amount and with bad faith (stand-ins for the traditional disqualifying conditions of "fraud and collusion") in the negotiations that produced it.
A Federal appellate Court has defined the "bad faith" prong of the disqualifying set of "unreasonable and in bad faith," in these terms:
Under Florida law, such agreements are unenforceable against insurers if tainted by fraud or collusion. To determine whether fraud or collusion exists, we look to whether the settlement amount was unreasonable and whether the negotiations were conducted in bad faith. Substantial evidence exists to support the district court's determination, after a bench trial, that the negotiations were conducted in bad faith when [the policyholder] agreed to stipulate to a judgment in an amount of [the claimant's] choosing so long as [the claimant] agreed never to execute against it. We thus affirm the district court's judgment that the settlement agreement cannot be enforced against Travelers.
Sidman v. Travelers Cas. & Sur. Co., No. 15-15197, 2016 WL 6803034, *1 (11th Cir. November 17, 2016) (emphasis added).
The italicized language was conclusive on the subject of bad faith, and bad faith alone was enough for the Federal appellate Court. "[W]e affirm on the ground that the settlement agreement was negotiated in bad faith, without the need to consider whether the settlement was reasonable in amount."
On another note, the appellate court held that even though The Travelers was aware of the impending consent judgment and its covenant not to execute, nonetheless the liability carrier could challenge the agreement:
Thus, an insurer may challenge a Coblentz agreement as fraudulent or collusive notwithstanding its prior notice of and opportunity to challenge the agreement. The district court properly applied the Coblentz framework in considering whether the settlement was unreasonable in amount and negotiated in bad faith—proxies for fraud or collusion—and did not err in allowing Travelers to challenge the settlement agreement.
Sidman v. Travelers Cas. & Sur. Co., No. 15-15197, 2016 WL 6803034, *7 (11th Cir. November 17, 2016).
Parenthetically, Federal Courts like the one which decided this case typically name such agreements "Coblentz agreements" after the case in which they first appeared in Federal Court. Florida State Courts do not use that name very often, ordinarily preferring to describe such an agreement in terms of what it is: an agreement for a consent judgment between a claimant and an insured where the carrier has refused to defend the insured. As a part of their agreement, the claimant and the insured also agree to a covenant not to execute the consent judgment upon the insured. The claimant pursues the insured's assigned rights against the liability carrier.
Carolyn Barge sued State Farm for uninsured/underinsured (U.M./U.I.M.) benefits. She also alleged claims for bad faith, breach of contract, statutory bad faith violations of the Washington Insurance Fair Conduct Act (IFCA), bad faith violations of the Washington Administrative Code claims handling regulations, violations of the Washington Consumer Protection Act, and negligence. During discovery she served State Farm with a request to produce its claims file. State Farm responded to the request by producing a "redacted" (lawyers' made-up word for "blacked out") claim file.
Ms. Barge filed a motion to compel production of "six sets of documents that State Farm withheld entirely or redacted in part on the basis of attorney-client privilege or the work product doctrine." Barge v. State Farm Mut. Auto. Ins. Co., No. C16-0249JLR, 2016 WL 6601643, at *1 (W.D. Wash. November 8, 2016). The District Judge granted the motion in part, denied it in part, and withheld ruling on the rest of it requiring an in camera inspection of certain withheld documents on the Judge's own motion.
This article addresses the issue of public knowledge of the contents of an insurance company's claim file during discovery, as exemplified in this case by the Judge's ruling on in camera inspection.
The documents as to which the Judge denied production and compelled production all concern reserves evaluations. In Washington, reserves evaluations are treated as work product for the most part and so they are generally privileged from discovery.
There were three sets of documents which look like they total nine (9) pages collectively, which the District Judge ordered State Farm to provide for in camera inspection. At no place in the opinion does this Judge say that State Farm requested an in camera inspection. Apparently what State Farm did was withhold and redact some documents, and oppose the plaintiff's motion to compel them. The in camera inspection was clearly the Judge's own idea.
The Judge required in camera inspection of certain documents because "the court has no way to determine at this time if the documents constitute work product and were created in anticipation of litigation," unless the Court could look at the documents. State Farm's privilege log and materials opposing the motion to compel including a declaration containing testimony about the documents did not, said the Court, disclose what was in the documents aside from saying that one "'is a comprehensive summary of State Farm's claims personnel's analysis'" of liability and damages, and another "contains 'pages from State Farm's "Injury Evaluation format'[.]" Barge v. State Farm Mut. Auto. Ins. Co., No. C16-0249JLR, 2016 WL 6601643, at *7 (W.D. Wash. November 8, 2016).
The Court recognized that "[t]he party claiming work product protection bears the burden of establishing that the work product doctrine applies." Barge v. State Farm Mut. Auto. Ins. Co., No. C16-0249JLR, 2016 WL 6601643, at *5 (W.D. Wash. November 8, 2016).
Clearly, State Farm did not meet its burden of establishing that the work product doctrine applies to the documents which the Court ordered State Farm to produce for in camera inspection. The only reason the Court made the in camera inspection ruling, and on its own motion to say again, is because the Court could not tell from State Farm's pleadings and proofs whether the documents were protected work product. The Court followed settled law (which it apparently did not need to cite in this regard) that disclosure during discovery is based on a document-by-document review, but that applies first of all to the parties who claim immunity from discovery, so that the law requires that the parties present their claim to a court as to each document they withhold or redact. At this point, the Court could have simply ruled that State Farm did not meet its burden of nondisclosure.
But of course the Court did not rule that the documents should be disclosed when State Farm did not meet its burden of proving work product after it withheld or redacted the documents. Instead the Court in this case required in camera inspection of the documents, with the Court apparently intending to inspect them each, one by one. A way to look at the Court's in camera inspection ruling is that State Farm caught a break, that the Court was bending over backward to give State Farm the benefit of doubt here.
Perhaps. But that would not explain the reasoning behind this ruling which seemed to indulge a presumption that the documents were protected from disclosure because a party said so, and that this presumption of nondisclosure is so strong that when it occurs as it did in this case, that the Court in this case would have to see the documents for itself to withhold them, or to disclose them.
But there is another way to look at the same ruling. In this case, the Court obviously gave no weight to, and did not even mention, any interest of the public including of other policyholders in having documents disclosed that might evidence statutory or common law or other bad faith conduct. What interest is that?
One answer might be found in the interest reflected in the Federal Rules and applicable law including the requirement that a party claiming immunity from discovery by raising work product as the reason has the burden to actually prove that work product applies.
More than one view is available of this ruling, perhaps.
Two trial judges and an appellate court in Massachusetts summarized a risk of extracontractual, "bad faith" exposure embedded in many cases across the United States whenever a liability carrier reserves its rights to deny all coverage, let alone when the liability carrier denies all coverage:
Quoting from another decision of the Superior Court, the judge sensibly observed that “an insurer cannot reserve its rights and thereby surrender control of the defense, and still reasonably expect that it will pay the same amount of legal fees that it would have paid had it accepted coverage and retained control of the defense. Through its reservation of rights, the insurer's duty to defend is transformed into a duty to reimburse its insured for reasonable attorney's fees incurred by the insured's chosen counsel.”
Rass Corp. v. Travelers Cos., No. 15-P-358, 2016 WL 6636281, at *9 n.16 (Mass. App. Ct. November 10, 2016). This statement of the risks involved is direct and to the point, but it states the prevailing law very well depending on the nature of the coverage defense which the carrier reserves. See generally 2 Dennis J. Wall, Litigation and Prevention of Insurer Bad Faith § 13.13, "Attorney's fees--Settlement or defense of third party's claim" (3d ed. Thomson Reuters West; 2016 Supplements).
"Before the Court is a motion to compel production of allegedly privileged documents and submission of more complete privilege logs filed by Plaintiffs(citations to the record omitted)." Durand v. Hanover Ins. Grp., Inc., No. 3:07-CV-00130-HBB, 2016 WL 6089739, at *1 (W.D. Ky. October 17, 2016) (Brennenstuhl, U.S.M.J.). The defendants are the Hanover Insurance Group, Inc. and the Allmerica Financial Cash Balance Pension Fund Plan.
The plaintiffs are Ms. Jennifer A. Durand on her own behalf and on behalf of an alleged class of former employees of Hanover. This is an ERISA class action lawsuit over Hanover's pension plan, specifically a so-called "cash-balance plan." Such plans require "a 'fair estimate of what the participant's future interest credits actually would have been" under prevailing Sixth Circuit case law applicable to this case. Durand v. Hanover Ins. Grp., Inc., No. 3:07-CV-00130-HBB, 2016 WL 6089739, at *2 (W.D. Ky. October 17, 2016) (emphasis by the U.S. Magistrate Judge).
The Office of the Inspector General of the U.S. Department of Labor audited the Plan for compliance with laws and regs considering a cash-balance model was involved. The OIG concluded that the Plan may have violated ERISA. Durand v. Hanover Ins. Grp., Inc., No. 3:07-CV-00130-HBB, 2016 WL 6089739, at *3 (W.D. Ky. October 17, 2016).
During discovery in the resulting ERISA lawsuit, the defendants withheld documents. They asserted the attorney-client privilege in support of withholding the requested documents, while the plaintiffs-employees-pensioners argued instead that the documents are an exception to the attorney-client privilege such that were fiduciaries like the defendants seek legal advice in their role as fiduciaries then they are really acting on behalf of the beneficiaries, like the plaintiffs, who are then entitled to see the documents in question. The Magistrate-Judge presiding over this dispute pointed out that the party asserting the attorney-client privilege in the first place bears the burden of proving it. Durand v. Hanover Ins. Grp., Inc., No. 3:07-CV-00130-HBB, 2016 WL 6089739, at *13 (W.D. Ky. October 17, 2016).
However, the Magistrate Judge held that "the analysis does not end here" and reviewed the withheld documents in camera:
In sum, the Court will first assess whether each document is subject to the attorney-client privilege. Next, the Court will determine who was the client at the time each document was prepared. Since Defendants are withholding the documents on claim of privilege, they bear the burden of demonstrating that each of the documents at issue are subject to the attorney-client privilege, and that they were the clients with regard to the privileged communications, not the plan beneficiaries.
Durand v. Hanover Ins. Grp., Inc., No. 3:07-CV-00130-HBB, 2016 WL 6089739, at *15 (W.D. Ky. October 17, 2016). And that is what the Magistrate Judge proceeded to do.
This was a boon to the defendants, I have no doubt. Many if not most judges would require the party to meet its burden of proof, not take it upon themselves to determine the outcome of the issue. The defendants were lucky in this regard.
Eight published pages in Westlaw later, the Magistrate Judge ordered that some documents be produced, and that some other documents be partially redacted (blacked-out) and then produced. (No documents were held appropriately withheld from all discovery entirely.) As for privilege logs, the defendants were ordered to comply with Fed. R. Civ. P. 26(b)(5)(A), the privilege log rule they were required to comply with at the outset of the discovery dispute in the first place.
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On Halloween, the Third Circuit Court of Appeals affirmed a Rule 12(b)(6) dismissal of claims including bad faith claims in Ensey v. Government Emp's Ins. Co., No. 15-1933, 2016 WL 6407379 (3d Cir. October 31, 2016).
The Third Circuit also took jurisdiction to decide on appeal the District Court's grant of summary judgment to the insurance carrier on the last remaining count of the policyholder's complaint in this case.
The policyholder claimed that among other things the carrier breached its duty of good faith and fair dealing under New Jersey law. The appellate court quoted her allegations in her lawyers' own words:
Ensey alleges that GEICO breached the implied covenant of good faith and fair dealing in four ways: (i) when it “failed to offer insureds ... the option of higher available UM/UIM coverage limits when insureds increased their BIL coverage limits,” (ii) when it used “unlicensed agents to sell such increased BIL coverage limits so the agents would be unaware of their obligation to so advise insureds,” (iii) when it failed “to provide CSFs [coverage selection forms] and Buyer's guides after insureds purchased increased liability limits,” and (iv) when it denied “UM/UIM claims thereafter based on the reduced limits purportedly ‘chosen by the insureds.’ ”
Ensey v. Government Emp's Ins. Co., No. 15-1933, 2016 WL 6407379, at *3 (3d Cir. October 31, 2016).
The policyholder apparently argued her insurance bad faith claim in terms of New Jersey's law of the covenant of good faith and fair dealing which is implied in all contracts. At any rate, that is how the Third Circuit addressed her fact allegations about UM/UIM coverage options which, it said, were legally insufficient to support a claim of bad faith here.
She argued that the implied covenant is breached when the defendant either acted in bad faith or demonstrated some other kind of inequitable conduct in the course of performing a contractual obligation. The Third Circuit agreed with this statement of New Jersey law, but held that the policyholder's fact allegations were legally insufficient to meet that legal standard. Accordingly, the Third Circuit affirmed the dismissal of her bad faith claims against the carrier in this case. Ensey v. Government Emp's Ins. Co., No. 15-1933, 2016 WL 6407379, at *3-*4 (3d Cir. October 31, 2016).